Dovish Fed Expected to Be Mostly Talk, Little Action

Fed Chairman Ben Bernanke is likely to do little more than keep the door open to more easing when the Fed winds up its meeting Wednesday afternoon.

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Collared doves

But the Fed should sound dovish, and economists also say there’s a good chance the Fed will announce that it is extending the time frame for its extraordinary low rate policy into mid-2015 from 2014. The Fed may also consider other actions, such as cutting the rate on reserves, but it is unlikely to do those things or another round of quantitative easing until September, at the earliest.

Yet, some traders say there are some market expectations for more action from the Fed Wednesday, and the stock market has been supported by that idea, and more recently, by the promise stimulus will come from the European Central Bank when it meets Thursday.

“I think the only thing they do is push out the calendar on the rate cut,” said Ward McCarthy, chief financial economist at Jefferies. “They just made a policy change six weeks ago. There are no press conferences. There are no revisions to economic forecasts, and they have the Jackson Hole symposium at the end of August, and I think that’s when they do the brainstorming and see what they come up with.”

The CNBC Fed survey, released Tuesday showed that 89 percent of the market participants surveyed expect the ECB to purchase sovereign debt, and 78 percent expect more QE from the Fed. But just 26 percent expect the Fed to announce new easing Wednesday, and half the respondents expect it in September. They also expect a Fed asset purchase program to total more than $500 billion.

“I think the markets might be too hopeful for the Fed tomorrow, but they have a backup plan and that’s that they’re too hopeful for the ECB on Thursday,” said McCarthy. “I think the ECB will deliver more than the Fed Thursday but not the whole package.” Among the things markets are watching for from the ECB are rate cuts, bond purchases, and a move to allow its permanent bailout fund to have banking status, an idea knocked by German officials.

The Fed extended its Operation Twist program at its June meeting. That program involves the purchase of longer-dated securities and sale of the same amount of shorter-duration Treasurys, in an effort to influence long term rates. But unlike QE, it does not add securities to the Fed’s balance sheet.

Fed officials have said if they did more QE, it might involve the purchase of mortgage securities instead of just Treasurys, but even the more dovish members of the Fed have cautioned the benefits have to outweigh the costs.

“We expect the Fed ultimately will deliver on quantitative easing, just not yet. It will want to have more data in hand,” said Pimco strategist Tony Crescenzi on “Fast Money.” “The likelihood is yes the economic data are worsening… The consumption data and chain store sales and factory data is not good.”

One of the most important pieces of data the Fed will get before its September meeting is two months of jobs data, including this Friday’s July employment report, expected to show 100,000 non farm payrolls were added.

“The timing of this meeting doesn’t give them time to have major new policy initiatives. That’s likely to come in September, if at all,” said Citigroup economist Steven Wieting. Wieting said he expects the Fed to extend their guidance on low long term rates to 2015.

Before the Fed statement at 2:15 p.m. ET Wednesday, there is a batch of data including the ADP employment report at 8:15 a.m. and ISM manufacturing and construction spending at 10 a.m. July auto sales are also released throughout the day, and economists are watching to see if the annualized selling rate remains at 14 million vehicles.

Stocks ended Tuesday lower, but the Dow, S&P 500 and Nasdaq were positive for the month of July. The Dow was up 1 percent for the month, at 13,008. The S&P was up 1.3 percent at 1379, and Nasdaq was just 0.2 percent higher at 2939. The 10-year Treasury finished the month with a yield of 1.488 percent, after touching a new low during July of 1.37.